Economic Development and Resource Management - Term Paper Example

? Macro & Micro Economics Contents Contents 2 Introduction 3 Monopoly Market 4 Microsoft in the Market 8 Arguments against Microsoft Antitrust Behavior 10 Arguments for Microsoft Antitrust Behavior 11 Conclusion 12 Works Cited 14 Name of the Student Name of the Professor Course Number Date Macro & Micro Economics Introduction The economic development in any nation can only be achieved with the benefits of efficient allocation of resources. The wants created by the individuals in the economy are always unlimited in nature but the resources available are scarce. It has been stated in the theories of economics that perfect competition among the corporate firms in the economy can maximize the welfare of the society and suffice efficient resource allocation. However, in the contemporary market conditions, business affairs are highly complex in nature. There are many situations in the economy where few corporate firms in the industry possess extraordinary powers to manipulate the price and quantity supplied. These are situations when the resource apportion in the economy are not proficiently executed. The wastage of productive resources in the economy leads to social welfare dampening. Thus, for ensuring proper economic development in a nation, the economy must be guided by the Mixed Economic Principles. In such situations, the power and the antitrust practices of the private business organizations are controlled by the public authorities. This project would focus on the antitrust behavior of the famous multinational company of Microsoft in U.S. (Ross, “The Economic Theory of Agency: The Principal's Problem”). Monopoly Market In the theory of economics, a monopoly market structure is characterized with no competition in the market. In this type of a market structure, there is only one seller in the market. On the other hand, the number of buyers in the industry is infinite. The single seller has the power to manipulate the market price of the product or service sold by him. The type of product or service sold by a monopoly seller in the market may be homogeneous or heterogeneous in nature. A monopoly seller is a profit maximizing agent in the industry. Figure 1: AR and MR Curve of a Monopoly Producer AR, MR Price or Average Revenue Curve (P or AR) Marginal Revenue Curve (MR) Quantity (Source: Authors Creation) The above diagram shows that the price or average revenue curve of a monopolist in the market is negatively sloped. The marginal revenue curve is also downward sloping for a monopolist. In the long run, a monopolist may enjoy normal (break-even) profit, supernormal profit or loss. A monopolist in the market discriminates among its consumers on the basis of the product prices charged to the customers (Gravelle and Rees 145). Figure2: Price Discrimination (Source: Stole, “Price Discrimination and Imperfect Competition”) As shown in the above diagram, a monopolist may discriminate among its consumers on the basis of prices. In the above diagram, for the s=2 demand curve, the monopolist charges price p2 and it charges price p1 for the demand curve s=1. It may seem that a monopoly structure is a hypothetical market but by adopting special business strategies, a firm might become a natural monopolist in the industry. Figure 3: Natural Monopolist (Source: Tragakes 184) A single seller may grasp an entire share of market demand by taking the First Mover Advantage in business. By increasing the base of customers, the company may enjoy economies of scale in production. Scale economies in the long run would help the firm to minimize the average cost of production. In such a situation, it would be impossible for another firm to enter in the industry and sell products at such low average costs. Thus, a natural monopolist in the market enjoys scale in economies of production and prevents other firms from entering the industry. Figure 4: Welfare Loss in Monopoly (Source: Mankiw and Taylor 253) As stated in the above diagram, the efficient quantity of output is much more than the monopoly output threshold. On the other hand, the level of price established by a monopolist is above the market equilibrium level. Thus, consumers receive lesser quantity at higher prices in the presence of imperfect market competition. This leads to imperfect allocation of resources, thereby causing deadweight loss in the economy. A deadweight loss is a loss that can never be recovered. In the contemporary world, the level of imperfect competition in the market can also be supported with a monopolistic competition. In this type of a market structure, there are only a few sellers selling differentiated (qualitative differences) products, whereas the number of buyers is infinite. The pharmaceutical industry is an industry in U.S. where the firms enjoy monopolistic market power. The government of U.S. has adopted active policies to augment the level of market competition and reduce the antitrust business practices of the corporate firms. The Antitrust Division of the Department of Justice and the Federal Trade Commission are the two organizations that seek for reducing monopoly or antitrust practices in U.S. Microsoft in the Market Microsoft is software providing multinational company that operates in almost all the countries in the world. The headquarters of the company is located in Washington. Today, the business and household entities cannot operate without the help of computers. The rises in the thresholds of literacy levels in nations have augmented the proportion of computer users in the market. There are many companies that use Microsoft operating system in order to execute their business operations. By enjoying a substantial share of aggregate demand, Microsoft has started to act as a monopolist in the market. Figure 5: Rising Microsoft Business (Source: Carlton, “The Lessons from Microsoft”) As shown in the above graph, the share of customers enjoyed by Microsoft has significantly improved from 2004 to 2012. In 4th April 2000, it was claimed by the Federal Government that Microsoft Corporation had violated the rules and regulations of the antitrust policy in the country. The antitrust laws established in U.S. are amalgamation of state and federal government laws. This law in U.S. controls the unfair trade practices of the companies and promotes competition in the market. It is analyzed by the economists that competition in the economy helps to augment the overall level of net social welfare in the nation. The Federal Justice segment has claimed that Microsoft has negatively influenced the satisfaction and utility of the consumers by reducing the level of competition in country’s software marketplaces. It has been claimed that Microsoft has preferred to merge a part of its business with the famous web browsing company, Internet Explorer. The company has undertaken this business decision to merge its operating system with Internet Explorer and enjoy a greater position of monopoly in the industry. It has been estimated that almost all the internet users have an inbuilt Internet Explorer browser in their computers. Thus, such a merger would make Microsoft a monopolist seller in the industry. This type of a merger would significantly harm the profits of the other potential rivals in the industry like, Netscape and Opera. This is because the merged business segment of Internet Explorer and Microsoft would act as a strong monopolist in the market. By acquiring the position of a monopolist, Microsoft Corporation would surely dampen the welfare level in the industry and lower the utility of the consumers. Many market researchers have also claimed that Microsoft Corporation has merged its business with Windows in order to enjoy anti-competitive or monopoly power in the economies. The Federal Trade Commission has failed twice to record a formal complaint against Microsoft Corporation for its antitrust business practices. Finally, after a three year enquiry, the justice departments of about thirteen states in U.S., including the District of Columbia, have managed to file separate anti-trust lawsuits against the company. It has been claimed that the company have foreclosed the business market of the computer operating system. This has been done by the company through the introduction of special direct contracts with the computer manufacturers. The direct manufacturers of computers are granted special discounts by Microsoft Corporation on the condition that those companies would be preloading Microsoft operating systems in their own computer operating systems. According to the contract, some computer manufacturers had to pay Microsoft royalty in the computer processors, even if the former’s system had actually included some other operating system. Further, Microsoft Corporation has acquired the majority of the stake of Netscape Inc. There was a situation in U.S. when ‘Navigator’ was the single software producing company in the industry. This is the way in which Microsoft Corporation had reduced the business competition in U.S. software industry (Shughart, “Barbarians at Bill Gates”). Arguments against Microsoft Antitrust Behavior The U.S. judge, Thomas Penfield Jackson, had been ruling the case against Microsoft. It was claimed that Microsoft had created an artificial barrier against the entry in the software industry. It was claimed that this artificial barriers associated with entry was created by the company by means of almost 70000 software programs in the market. It was claimed by Mr. Jackson that if a new vender had to enter the software industry, then it had to make huge investments. This is because the new entrant in the market needed to make at least 70000 software programs for satisfying the consumers in a similar manner like, Microsoft. It was claimed by Judge Jackson that the artificial barriers to entry created by Microsoft Corporation was unfair for the other producers and consumers in the industry. With access to monopoly, Microsoft had the power to manipulate the prices of the software programs. The prices of the software programs were raised much above the actual cost incurred in their manufacture. A large part of the consumer surplus was grabbed by the company through its concentrated power. It was believed by the some analysts that competition among the business firms were necessary for greater creativity and innovation in the industry. Thus, the monopoly power enjoyed by the Microsoft Corporation was not beneficial for the long run growth of the software industry. The public and the anti-trust regulating authorities in U.S. had imposed a lot of restrictions on Microsoft Corporation for its anti-competitive practices. The company was not allowed to enter into any license agreement regarding the licensing activity of any other Covered Product or operating system software products. It was also claimed by the U.S. antitrust investigators that Microsoft Corporation was behaving in an exclusionary pattern. This is a behavior of the monopolist in a market, where the single seller does not allow the rivals in the industry to use the scarce resources of production. Through the same, the monopolist increases the cost of production of its rivals, thereby reducing the level of competition in the industry. It was found that Microsoft was forming contractual agreements with some of the suppliers in the market. Through these contracts, the company (Microsoft) did not allow some of its rivals in the industry to use the scarce resources provided by the suppliers (Gilbert and Katz, “An Economist’s Guide to U.S. v. Microsoft”). Arguments for Microsoft Antitrust Behavior It is claimed by some economists that imperfect competition is sometimes beneficial in the economy for encouraging creativity and innovations in markets. For instance, the pharmaceutical companies would not invest a wholesome amount (about 5% of their aggregate revenue) for the purpose of research and development, provided that their new innovations are not monopolized through patents by the government. New live-saving medicines are discovered because these companies make high expenditures on research and development. Thus, according to the views of these economists, monopolistic powers enjoyed by the firms are sometimes useful to augment the welfare in the economy. It is claimed by some analysts that by increasing the number of Windows-based applications, Microsoft has actually stirred competition among all the software developers in the industry. This has helped to provide higher quality software services to the customers at more efficient prices. Thus, this analysis explains that Microsoft Corporation, through its monopoly powers, has actually augmented the value of computer hardware and software among the consumers. It has also been stated by these analysts that the number of Windows applications that has been introduced by Microsoft is not 70000 (McKenzie, “Microsoft’s ‘Applications Barrier to Entry:’ The Missing 70,000 Programs”). The numbers of applications are few but each of the applications has various versions. Even the numbers of applications in the operating systems required by the consumers are very few in number. Thus, if a new entrant enters the software industry, it can only invest in devising a few required programs initially. The above justifications state that Microsoft Corporation did not actually create an artificial barrier of entrance in the software industry. Therefore, the claim that had been made by Justice Jackson on Microsoft (for enjoying monopoly power) was actually not entirely plausible (Hubbard 44). Conclusion Competition in the marketplaces is highly advantageous for the development of social welfare. Impartial and efficient provision in resources can never be achieved without the enhancement of social well-being. Economic enlargement in a country can only be accomplished with the benefits of efficient and equitable allotment of resources. However, in reality as shown in the above context, the market consequently fails and engages in many failures. This is the time when the role of government should become active. The antitrust authority in U.S. has tried to increase the level of competition among the companies in the country. It also tries to augment the competitiveness of the domestic companies, so that they can serve a better competition with other firms in the international market. It would be correct to conclude that Microsoft Corporation had tried to act as a monopolist in the market. However, if the power of a monopolist is checked by the regulating institutions, then the concentration of power can stir and enhance the competition in the long run (Boyes and Melvin 189). Works Cited Boyes, William and Michael Melvin. Microeconomics, 9th ed. Connecticut: Cengage Learning, 2012. Print. Carlton, Dennis W. “The Lessons from Microsoft,” Business Economics, 36, pp. 47-53, 2001. Web. 26 November 2013. Gilbert, Richard J. and Michael L. Katz “An Economist’s Guide to U.S. v. Microsoft.” Journal of Economic Perspectives, 15, pp. 25-44, 2001. Web. 26 November 2013. Gravelle, Hugh and Ray Rees. Microeconomics. New Jersey: FT/Prentice Hall, 2004. Print. Hubbard. Macroeconomics. Delhi: Pearson Education India, 2007. Print. Mankiw, N. Gregory and Mark P. Taylor. Microeconomics. Connecticut: Cengage Learning EMEA, 2006. Print. McKenzie, Richard B. “Microsoft’s ‘Applications Barrier to Entry:’ The Missing 70,000 Programs.” Cato Institute. Washington, 2000. Web. 26 November 2013. Ross, Stephen A. “The Economic Theory of Agency: The Principal's Problem.” American Economic Review, 63, pp. 134-139, 1979. Web. 26 November 2013. Shughart, William F. “Barbarians at Bill Gates.” The Independent Institute. The Freeman, 2000. Web. 26 November 2013. Stole, Lars. “Price Discrimination and Imperfect Competition.” Citeseerx, PSU, 2000. Web. 26 November 2013. Tragakes, Ellie. Economics for the ib diploma with cd-rom. Cambridge: Cambridge University Press, 2011. Print. Read More